The "Giant Sucking Sound" Recession--What Ross Perot Did Not Tell Us

A month ago I gave testimony at a Texas Senate committee concerning bills to close a loophole in Texas lending law.  Last week I had another opportunity to speak before the Texas House of Representatives Committee on Pensions, Investments, and Financial Services.  The loophole has allowed an abuse of the Credit Service Organization (CSO) law, designed to regulate businesses who help people with bad credit "repair" their credit.  To operate, they need to charge fees, and this law sets the terms for their operation.  They are not lenders, but provide a service.

Unscrupulous lenders came along and decided to create a business model which would make use of this law to prey on borrowers who believe they cannot get traditional loans from banks, credit unions, or consumer credit storefronts.  These lenders claim to be CSOs.  Officially, they are not the lenders.  They have a cozy relationship with a lending organization which operates under the restrictions of the usury laws.  Therefore, the borrower gets a loan at a low rate of interest around 1% per month.  THE CATCH is that in order to get this loan, the payday lender or car title lender charges a CSO "fee" of $20 per $100 for a 10-day or 14-day or 30-day loan.

That "fee" is really interest, masquerading as a CSO fee.  The loans cannot be paid in installments.  If they can't repay the whole amount of the short-term loan, the "CSO" can arrange another loan for another "fee."  Let's get this straight.  On a regular schedule, the borrower pays a "fee" in order to keep a loan from going into default.  The principal does not decrease, and a "new loan" replaces the "previous loan."  Again, the borrower is forced to come up with the entire principle within a few days or face another "fee" to get a "new loan."  I'm setting a record for scare quotes here.  That is a bunch of technicalities and paperwork to bury the truth that lenders are charging usurious interest rates on short-term loans designed to be hard to pay off.

If I pay a $20 (20%) fee to use $100 for a month, the annualized rate is 240%.  On this business model, if I am living close to the edge in my finances and the month lasts longer than the money, I could end up paying $240 in a year without paying off any of my $100 debt.  The average short-term payday loan is $300 to $500, so the amounts would be three to five times as much as this case:  $720 to $1200.  But that is for a 30-day term, while most payday loans can recycle two or three times a month, charging "fee" after "fee" after "fee."

Pastors, priests, and church community ministers from around the state delivered testimony about the effects of payday lending on their parishioners and neighborhoods, along with the Better Business Bureau, United Way, and City Government:  Del Rio, San Antonio, Houston, Midland, Dallas, Austin, Fort Worth, Palestine, LaPorte, El Paso, and all around the state.  Thanks go out to Suzii Paynter of Texas Baptists, to Texas IMPACT, and to the Texas Catholic Conference for their leadership in this effort.  Only two lobbyists stood up to oppose the bill.  I guess they could see what was coming and decided to do their work behind the scenes.  We found out that day that $8 million has been spent by the payday lending industry to kill this legislation, so I was not fooled into thinking that they were conceding this fight.  In fact, it seems they are increasing their efforts.

Sadly, the chair of the committee, Rep. Vicki Truitt of Tarrant County, who treated us all with respect on the day of the hearing (even if she did think I was talking too loud), has come out against closing this loophole in the name of "finding a compromise which can keep these lenders in business."  In other words, she is caving in to the industry demand for higher interest rates even though there is no credible evidence that people using these predatory financiers would not be able to get a loan if the loophole is closed.  Maybe some kinds of lending businesses would close, but the lending will go on at rates less likely to create a system of permanent indebtedness.  If fairer lending goes on, then the jobs the lending provides will not go away.  Reps. Ken Legler of Harris County, Rafael Anchia of Dallas County, and Marc Veasey of Tarrant County all seemed very knowledgeable about this issue, but it was not clear where on the committee there was strong support for closing this loophole.

What these businesses do is target communities of very low income working poor.  In Austin, they targeted school teachers when the press was claiming as many as 30% of teachers could be laid off before the coming school year.  They locate in clusters in order to make as many short-term loans as they can to people who are led to believe they have no other options.  They feed off each other's business because people take out a second loan down the street to pay off the fees on the first loan.  In the process, we hear what Ross Perot once called a "giant sucking sound."  That is the sound of low- and middle-income paychecks being sucked out of their communities into the executive bonuses of the payday lending corporations.

This entire recession is about that giant sucking sound.  It started with mortgage-backed securities, and when the demand for those grew, it became a feeding frenzy of sub-prime lending, speculative real estate pricing, and a housing bubble.  Then it matured into a labyrinth of credit default swaps and bonus-incentivized selling of toxic assets, creating an unregulated house of cards which crashed on the backs of the middle class workers.

What follows is the testimony I offered on March 22.  It is similar to what I said at the Senate committee in February, but reorganized and tweaked at a few points.  You can hear it down below.

My name is Dr. Mike Broadway.  I am a Baptist minister and theological professor living in Salado.  I come representing myself and any citizen offended by predatory lending.

         I have been working for the past two years with pastors, seminary professors, and all sorts of church people to address economic injustices pertaining to predatory lending and usury in its many forms, from high credit card fees, to foreclosure abuse and fraud, to tax refund loans, to predatory payday lending. 

My colleagues and I have met with top executives of Bank of America and Wells Fargo/Wachovia, with AGs Tom Miller of Iowa and Roy Cooper of NC who are leading the national investigation into foreclosure fraud, and with congressional leaders in various states and Washington, DC.  Predatory lending is a national problem, and it is a local problem, that has to be addressed on every front.  I’m here today because you have a chance to make a difference for the citizens of Texas.

         The biblical tradition makes a clear statement concerning usury, or unjust lending practices.  It says that no society can be a just society if it allows lending practices that create and maintain a permanent debtor class.  Laws against usury go back at least four thousand years, more broadly than the Jewish and Christian traditions.  Yet the writing of new laws in Texas and across the US as recently as 1979, 1980, and 1987 has ignored the wisdom of millennia and allowed the protections against usury to be swept away. 

         Lenders claim when they speak to you and to the press that they have to be able to charge usurious rates to stay in business.  They must be terribly inept financiers, because for four thousand years financial institutions have flourished under regulations against usury.  Why do these people need to make so much more in interest?  They don’t.  There are many current business models which flourish serving the communities where payday lenders do their predatory work, but without preying on their customers.

         Payday lending as we know it is a new financial form of sharecropping.  It is debt sharecropping.  Just like the unfair systems which kept sharecroppers always indebted to the landowners whose land they cultivated, payday lending places barrier after barrier in the way of borrowers in order to maintain a subscription to their future income. 

The business plan is perpetual indebtedness for those who are struggling to make ends meet.  Portraying themselves as a friend who is doing a service, they draw people into the trap of usurious borrowing.  Under the guise of being a CSO, these lenders are “the guy who knows a guy who can get you the money right away, but it’ll cost you.”  We all know what to call this kind of lender:  the term is loan shark.

         The current law allows this trap to be set.  The law has a loophole, and predatory lenders squeezed through it and stretched it wide.  One of their favorite deceptions is the doublespeak that calls interest by another name—a fee.  But if I borrow money from you, and you charge me for borrowing the money, then that is interest, no matter what you call it. 

The ancient text of Deuteronomy makes it very clear that usury is usury, whether you collect a fee up front, you charge it along the way, or you claim it at the end of the agreement.  Playing with the words, this smoke and mirrors, uses a loophole in the letter of the law in order to disregard the spirit of the law.  It also ignores what Jesus called the weightier matters of the law, justice and mercy.

         Rampant injustice in CSO lending is why you must close this loophole.  Stand in the heritage of Texas, a heritage of protecting workers and homeowners from usury, protecting us from large national corporations who suck the life out of neighborhoods so that they can pay huge bonuses to executives who have devised these schemes of debt sharecropping.